Time to Bottom Feed Across the Pond

The U.S. stock market is expensive and bond yields aren’t far from record lows. European and emerging market stocks, on the other hand, have approached stomach-turning status, says Jason Zweig of the Wall Street Journal. The European market has dropped by 12% while emerging markets have plummeted by 21.8%.

Stabilized oil prices and a possible interest rate hike by the Fed has lifted investors’ outlook on these markets by a marginal 2% to 3%, but the fact remains that overseas stocks are cheap. In fact, according to data from MSCI, as of April 30th the average price-to-book value of European stocks has been about 40% below that of U.S. stocks (50% for emerging markets) and the dividend yield 69% higher (33% in emerging markets).

According to David Herro, manager of the $26 billion Oakmark International Fund, a few leading European banks offer “acute value” due to decreasing expenses, healthy capital cushions and decreasing losses from non-performing loans. On the emerging market front, Robert Arnott (chairman of Research Affiliates), says that while a lot can go wrong, it wouldn’t take much good news to create a bull market. In the meantime, the low stock prices “offer margin for error while investors wait for positive surprises,” writes Zweig.